Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.
While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.
The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.
This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.
In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.
Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair. As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.
From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.
From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s. However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.
To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time. There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls. Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.
From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change. Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.
Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features. From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This week featured a significant announcement from General Electric, namely that the U.S. Federal Aviation Administration (FAA) certified a 3D-printed manufactured part to operate within certain GE commercial jet engines.
A blog commentary featured on the GE Reports site indicates that a fist-sized piece of silver metal that houses the compressor inlet temperature sensor inside a jet engine, known as T25, is becoming a symbol of one of the biggest changes sweeping jet engine design. GE Aviation is currently working with Boeing to retrofit more than 400 GE90-94B jet engines with the 3D printed part. This family of engines power Boeing’s 777 commercial aircraft. High resolution photos of these parts are featured in the commentary.
The report further indicates that GE Aircraft has already initiated flight tests for the next-generation LEAP jet engine, produced in a 50-50 consortium with CFM International, which will include 19 3D-printed fuel nozzles. The LEAP engine will power Airbus’s newly designed A320neo and Boeing’s 737MAX aircraft models.
The planned GE9X engine will further be developed with 3D-printed fuel nozzles and other parts.
GE was one of the early adopter manufacturer’s that has embraced additive manufacturing methods for nearly a decade. According to GE, additive manufacturing allows design engineers to replace complex assemblies with single parts that are lighter. The use of 3D-printing methods accelerates design development and new product introduction times. Once more, GE is printing parts from materials such a cobalt-chrome alloy. In the case of the GE90 printed nozzle housing, the process from final design to FAA certification and service introduction spans what is described as six months.
In digesting this report, Supply Chain Matters further envisioned that the introduction of such 3D-printed aircraft engine components can significantly benefit both ongoing production as well as operational service parts needs. Instead of stocking global-wide manufacturing or service parts depot inventories, replenishment orders can trigger the printing of an additional part, with considerable inventory cost savings. In some cases, we would envision the part being printed directly at a regional repair and maintenance depot.
Next-generation additive manufacturing methods are indeed beginning to make a presence and the benefits described by global manufacturers such as GE, are indeed described as breakthrough technology.
Many of our Supply Chain Matters commentaries related to supply chain disruption and supply chain risk management relate to events that many would not believe would actually happen. This weekend featured the news that even iconic General Electric can be impacted by an unforeseen event, a devastating warehouse fire impacting a massive production facility.
Last Friday, a parts warehouse supporting GE’s home appliance factory complex in Louisville Kentucky was destroyed in a six-alarm fire. Nearly 200 firefighters battled the blaze and as of this writing, local news media reports indicate the hot spots remain. Luckily, there were no injuries since most employees had taken time-off for the Good Friday religious observance. According to media reports, the fire in Building Six raged for hours and required evacuation of the entire 900 acre Appliance Park factory complex. GE has since decided to suspend all production for at least a week while assessment of overall damage to operations and contingency plans are completed.
Appliance Park produces dishwashers, refrigerators, washing machines among other consumer appliances. Already, GE officials have indicated that an alternate space for the Building 6 warehousing operations has been identified and it does not anticipate any disruption for customers. A Wall Street Journal report quotes a labor union spokesperson as indicating that adequate inventory is available at an adjacent distribution center. These are obviously a timely business continuity response.
Ironically, GE had previously agreed to sell its home appliance business to Europe-based Electrolux for a reported $3.3 billion. The deal was expected to close later this year.
Generally, past events of this nature often provide a different picture once full assessments are completed. In the case of this warehouse destruction, assessment will focus on both product manufacturing and service parts supply chain needs. However, manufacturers such as GE have made investments in business continuity response and supply chain risk mitigation.
More news should be forthcoming in the coming weeks.
There has been a new development regarding the ongoing large number of product recall activities involving suspected automobile defective airbag inflators produced by supplier Takata Corporation.
The Associated Press is reporting that rival Japan based airbag inflator supplier Daicel Corporation announced last week that it will accelerate the building of a second U.S. factory in Arizona to meet the growing demand for alternative capacity for these components. This supplier, responding to specific requests from Honda Motor for an alternative supplier, and expects to start operating the Arizona facility by March of 2016. According to this report, Daicel has further plans to increase production of inflators at its existing factory in Western Japan to supply additional replacement parts later this year.
This is an obvious sign that alternative component supply arrangements are being initiated as Takata continues to struggle in resolution of current component needs.
An interesting news release came across our Supply Chain Matters news feed last week, one that perhaps demonstrates the broad capabilities of certain contract manufacturers within the automotive and truck sector.
Mercedes Benz’s U.S. entity and AM General LLC jointly announced that because of the increasing demand for the Mercedes Benz R-Class luxury vehicle, and the subsequent need for increased capacity, that the luxury sports utility vehicle would now be moved from the Mercedes U.S, Tuscaloosa Alabama facility and instead be manufactured at AM General’s commercial assembly plant in Mishawaka Indiana. Under this multi-year agreement, AM General becomes Mercedes first and only contract manufacturing operator within the United States. The R-Class vehicles manufactured and assembled by AM General are expected to roll-off its assembly lines this summer.
According to its web site, AM General designs, engineers, manufactures supplies and supports specialized vehicles for commercial and military customers. The manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company further provides support in service parts and integrated logistics as well as supply chain management.
AM General’s business units include three wholly owned subsidiaries, diesel engine manufacturer General Engine Products, automatic transmission manufacturer General Transmission Products, and Mobility Ventures which is the prime recipient of the contract manufacturing agreement. However, this manufacturer would best be known by U.S. and other military veterans as the original designer and manufacturer of the famous HMMWV (Humvee®) troop transport vehicle.
AM General’s Mobility Ventures produces the iconic HUMMER® H1 and H2 branded vehicles, along with specialized wheelchair accessible vehicles for public and private transportation. As a result of the new partnership with Mercedes Benz USA, the manufacturer further announced the hiring of two new senior executives, a new business unit President and an executive vice-president engineering, sales, distribution and dealer support.
The multi-purpose manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company additionally features specialized support in service parts and integrated logistics as well as supply chain management.
We at Supply Chain Matters could not help but think about the contrasts related to this announcement. Picture the Humvee or H1, (pictured above) the embodiment of rugged, tough and explosive-proof, being produced in the same facility as a luxury SUV with all the driver and passenger creature comforts. That is quite a contrast.
Then again, it could provide a testimonial to the notions that product design integration and contract manufacturing services can co-exist among various purpose-built vehicles.
In late 2010, Supply Chain Matters introduced our readers to Paris based Lokad, a rather unique technology services provider which at the time we coined as mathematicians on-demand. After our initial briefing with Founder Joannès Vermorel, we came away with an impression that industry supply chain teams had an interesting and somewhat cost affordable alternative in generating much more sophisticated timely and accurate forecasting techniques.
The company differentiated itself on the sophistication of its staff of highly trained mathematicians who take on challenges reflected in difficult forecasting problems. Customers are provided alternatives in loading product demand data “as it is” via the cloud, leveraging a Microsoft Azure platform, avoiding the need to perform tedious data formatting and pre-analysis. Vermorel and his team described themselves as rather pragmatic in the view that the goal is not to have the most accurate forecast, but rather a more automated means to determine the best response to fulfilling product demand under challenging constraints.
We checked-in with founder Vermorel in 2013 to learn about Lokad’s diversification efforts in quantile forecasting services and supporting software. As opposed to deterministic or mean-driven forecasts where respective forecast weighting are averaged, quantile forecasts introduce a purposeful bias in the forecasting algorithm and can be viewed as a stochastic method for forecasting. Our 2013 briefing notes reflected that Lokad continued to test its quantile methods on many industry verticals including the production of auto parts, electrical supplies, textile products, spare parts and packaging materials. Lokad consultants work with customers to fully understand their planning needs and develop a more sophisticated planning approach utilizing their cloud-based software platform.
A lot has occurred in advanced supply chain planning methods since 2010, most notably the notions of predictive and/or prescriptive analytics being applied to supply chain product demand and resource needs. The demand for trained individuals in analytics and Big-Data analysis in-fact has become so intense, that we called our readers attention to a Wall Street Journal report in August of last year indicating that one of the hottest jobs in tech was that of a data scientist. The WSJ noted that in certain cases, data scientists were commanding $200,000 – $300,000 annual salaries due to the shortage of such skills. Many supply chain teams as well as business teams would view that full-time expense as expensive or burdensome.
Kicking off 2015, we were thus very eager to include a check-in again with Lokad.
To little surprise, we learned that the company has now positioning itself as “Quantification Optimization for Commerce” and has since moved into offices twice its original size. The technology provider has now amassed hundreds of customers, has branched into a number of quantitative services and has developed its own next generation programming language specifically for supply chain planning and forecasting needs. We were informed of the firm’s first 7 figure engagement and its efforts to dive far deeper into challenging and industry-unique supply chain planning challenges.
What is rather unique and refreshing is that Lokad continues with its model of on-demand mathematicians providing ongoing analytical services for clients periodically during any given year. The Lokad cloud-based forecasting engine generates product forecasts predicated on probabilities and a range of predictions predicated on operational business metrics and/or operational risks. The explosion of Omni-channel commerce in retail sectors has especially fueled such needs and requirements as well as the unique needs of service focused supply chains related to highly sophisticated equipment.
We explored some current observations regarding the state of certain industry forecasting, specifically that Lokad has amassed over hundreds of engagements, The provider continues to observe fixed vs. fluid or more agile focused assumptions related to planning. For instance, top management at some firms has not taken the time to change inputted assumptions related to the cost of capital. A forecasting model for a U.S. firm continued to run with the assumption of a 6 percent cost of capital when cash is available at a far lower rate. Such a rigid assumption can often derail the accuracy of more predictive decision-making methods.
Our briefing included an in-depth discussion on the current state of Big-Data and predictive analytics initiatives across various industry settings. Vermorel apparently shares in our belief and prediction that many initiatives can well be de-railed in the coming months and years because of a lack of proper design. According to Vermorel, they include a “naïve rationalism” and actually fail at truly capturing the true drivers of the business and of the supply chain.
This author was so captivated by these observations that we extended an invitation for a Supply Chain Matters guest posting so that our readers can specifically learn from such observations.
Thus, what follows this updated commentary on Lokad is Founder Joannes Vermorel’s gracious guest posting, The Challenges and Obstacles of Big Data and Analytics Applied in Supply Chain and Commerce Decision Making.
We sincerely thank him for his contribution and insights.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.